Have you ever wondered what angel investors are really like?
Scott A. Shane’s book, “Fool’s Gold: The Truth Behind Angel Investing in America,” takes a refreshingly candid approach to the observance of angel capital.
He makes it clear that his book doesn’t focus on the fairy-tale stories we often hear of. Instead, Shane uses real-life data to examine the inefficient, and misunderstood field of angel investing.
Right from the beginning, Shane makes it clear saying, “I’m going to do something different. I’m not going to tell you the stories of the exciting and glamorous cream of angel investing crop. Instead, I’m going to tell you about the typical investment made by the typical angel in the typical start-up that this investor finances.”
The data and true-to-life examples revealed in the book make it clear that it’s for every participant in the start-up community.
Whether you’re a bootstrap-lovin’ startup or a member of a local angel club, you’ll find this book to be a pivotal source of information.
The book addresses the following questions (plus more):
- What is angel investing and how is it different from other kinds of investing?
- Should you become a business angel?
- Should you try to raise money for your company from a business angel?
- How big is the angel capital market and how many companies do angels finance every year?
- How many people make angel investments and how often do they make them?
- Who is the typical angel investor and where can I find one?
- How do angels fund deals and how do they evaluate them?
- What kinds of companies and entrepreneurs are angels looking for?
- What are the terms of the typical contract between and angel and an entrepreneur?
- How much money do angels make?
- What do truly successful angels do that is different from the run of the mil investors?
- What makes some places better than others for angel investing?
- What public policies enhance investing in a region?
The book then quickly dives into the fundamentals of angel investing. Like a textbook, Shane outlines certain terms and defines them. Shane seems right, in that, the field is scattered with terms that oftentimes can get misconstrued. Shane makes it a point to define and clarify each term (the three F’s, Passive Angels, Active Angels, Angel Group Members, Individual Angels, Super Angels, etc.)
A fantastic section asks a question not covered in most text books. And, although common-sense, Shane addresses the question: “Why do people become angels?”
He lays forth the following reasons:
1. To Make Money
2. To Get Involved with Private Companies
3. To Learn New Things
4. As a Hobby Job
5. To Find a Job
6. To Help the Community
7. Because a Friend of a Friend Has a Business
Although simple, the precedent reasons are critical elements to think about before becoming an angel or trying to raise angel capital.
Additionally, Shane summarizes each chapter with “Key Facts to Remember”
One in particular contained some very interesting data:
- Amount invested by informal investors in a typical year: $162 billion
- Amount invested by friends and family investors in a typical year: $139 billion
- Amount invested by business angels in a typical year: $23 billion
- Amount invested by accredited business angels in a typical year: $12.4 billion
Another astonishing figure was the “Income and Net Worth of Angel Investors.” Every textbook that I’ve read in entrepreneurship and venture finance described angels as, “High net worth investors that provide around $250k to $1m.” One thinks of angels as wealthy individuals with tons of cash to throw around. The antithesis seams closer to the truth:
Income and Net worth of Angel Invesors:
- Less than $1 Million Net Worth: 66.7% of angels
- Negative Net Worth: 16.7% of angels
- Married with More than $300,000 in Household Income: 13.6% of angels
- More than $200,000 in Household Income: 22.7% of angels
- Less than $40,000 in Household Income: 31.8% of angels
- Less than $25,000 in Household Income: 22.7% of angels
If you think this is surprising, there are many other even more surprising characteristics outlined in the book. Shane, of course, backs these findings with data-rich analysis. It’s a mind-opening book, really.
Here are some more data-driven highlights:
- Number of new businesses founded every year that project $10m in sales in 5 years: 80,000
- Number of new employer corporations founded every year: 9,131
- Number of companies founded each year that achieve $5m or more in sales in 6 years: 8,154
- Number of companies founded each year that achieve $10m or more in sales in 6 years: 3,608
- Number of companies founded each year that achieve $50m or more in sales in 6 years: 474
- Number of companies founded each year that achieve $100m or more in sales in 6 years: 175
- Median size of an angel investment: $10,000
- Proportion of angel funding in the form of debt: 40.2%
What do angel investors look for?
- - High growth potential e.g. expected ROI to be at least 30% and greater than 5 times money over expected holding period.
- - Experienced, strong, cooperative management team in place. Management should have sales experience in the targeted market segments.
- - Well-defined and analyzed segmented market–large or fast growing.
- - Clear and complete marketing plan including details on distribution channels, positioning, marketing, promotion, and sales, strategies, and staffing needs.
- - Clear and details competitor analysis, e.g. why we can beat them
- - Aggressive market approach with unique selling proposition.
- - Understandable proprietary technology.
- - Well structured, complete business plan with executive summary.
- - Financial projections (i.e., P&L, Balance Sheet and Cash Flow) with explanatory notes and assumptions
- - Board or Advisory position offered/available for investors.
- - Staged investment based on milestones
- - Debt or preferred shares convertible to common if pre-revenue stage.
- - Sales start no later than the first equity injection/conversion
- - Positive cash flow within 12 months
- - Financial buffers to carry company six months under worst-case scenario.
- - Detailed budget and milestones.
- - High quality outside advisors.
- - Substantial investment by management and controlling owners.
- - Investor exit options within three to five years.
- - Downside protection, where appropriate.
- - Deal sizes $200k to $2.0 million.
- - Clear plan for use of funds with impact analysis for higher and lower funding, where appropriate.
- - Plan for subsequent financing rounds until company is self-supporting with cash flow.
- - Reasonable, justifiable valuation.
- - Below market cash compensation to management pre-profit.
Age Distribution of Primary Owners of Businesses with External Equity Investment:
Age Category of Primary Owner – Share of Businesses Receiving External Equity Investment
- Under 25 - 0.05%
- 25-34 - 9.92%
- 35-44 - 33.40%
- 45-54 - 34.43%
- 55-64 - 17.07%
- 65+ - 5.13%
I find these statistics to be the most annoying. If you’re a regular reader of my blog, you understand that I firmly believe in investing in Generation Y. Especially when looking at the social media sector. 0.05%, are you kidding me?!
Business Angels are said to seek entrepreneurs with the following qualities:
- Passion
- Persuasiveness
- Confidence
- Perserverance
- Leadership
- Self-awareness
- Vision
- Flexibility
- Honesty
- Openness to Others
- Team Orientation
- Coachability
Performance of Angels (some statistics):
- Proportion of angel investments that end in an IPO: 0.17 to 0.2%
- Prportion of angel investments that end in acquisition: 0.8% to 1.3%
- Valuation of the typical surviving startup at the time that angels target exiting: $204,000
Annual due of angel networks:
- Average: $992
- Median: $750
Angel Group Statistics:
- Median age of an angel group: 3 years
- Median size of an angel group: 37 members
- Number of companies that present to the average angel group every year: 24.1
- Number of companies receiving investment by the average angel group every year: 3.8
- Proportion of angel groups that like seed/start-up stage investments: 80%
Education:
- Portion of angels who didn’t graduate from college: 24%
Conclusion:
All of these statistics barely scratch the surface of the surprising data unearthed in Shane’s work (he outlines how age has no clear effect on angel investing, how African Americans aren’t underrepresented in the angel community, how most angels are inexperienced investor and entrepreneurs, and much more).
There’s a wealth of mind-opening information in Shane’s book. And best part, it’s consolidated into 231 pages. It’s not a drawn out guide, which I liken to many books in the angel investment field.
Shane’s book is one of, if not the, best book I’ve ever read on angel capital. I’ve poured through advanced valuation textbooks, term sheet how-to’s and due diligence workshops. All of these lessons featured intelligent instructors and authors; however, they all missed the 1,000 foot view. They didn’t address simple, yet profound facts about angel investing that Shane outlines so thoroughly.
This book is definitely worth a read–especially if you’re thinking about raising angel capital.
You can find the book here
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